Join 17 Million Tax Dodgers!

Millions of Brits use ISAs to avoid taxes. In total, we have £208 billion stashed away in these lovely, legal tax shelters.

Since Individual Savings Accounts (ISAs) were launched, they have become increasingly popular with British savers and investors.

ISAs replaced Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) in April 1999. Subsequently, they have proved very attractive to savers who wish to avoid paying tax on savings interest. Also, they appeal to investors who wish to avoid paying capital gains tax on profits from shares. In addition, higher-rate taxpayers can avoid paying extra tax on dividends (the income from shares) by holding shares inside ISAs.

In the past eight years, the sums pouring into these tax shelters have soared, with the total now standing at £208 billion, according to HM Revenue & Customs (HMRC). In their early years, we stuffed around £28 billion per tax year into ISAs. However, this annual amount has climbed steadily, and reached £33 billion in the last tax year. According to HMRC, a total of seventeen million people have one or more ISA accounts, and more than 13½ million contributed to one in 2006/07. Therefore, ISAs take top honours as the UK's favourite legal tax shelters.

For the record, we Brits had £29 billion squirreled away in ISAs in April 2000, so our ISA pot is now worth more than seven times what it was at the turn of the century. Furthermore, our ISA assets have been boosted by the stock-market recovery which began in 2003, and by savings interest and other income.

Interestingly, our £208 billion in ISAs is only £8 billion less than the £216 billion that we Brits owe in non-mortgage debt (which includes credit and store cards, car and personal loans, overdrafts and so on). In theory, the UK could solve its debt problem at a stroke, simply by using ISA assets to repay outstanding debts. Alas, generally speaking, the people with the ISAs don't have big debts, and vice versa. Thus, this is a non-starter for most of us!

Anyway, the good news is that, after some uncertainty over their future, ISAs are here to stay. Indeed, contribution limits are set to rise from 6 April 2008, as the following table shows:

Note that you cannot contribute the maximum amount to both types of ISA. For example, if you pay up to £3,000 into a cash ISA this tax year, then the most that you can pay into a shares ISA falls to £4,000.

Finally, thanks to the power of compound interest, ISAs really come into their own when you're investing over the long term. My wife and I have paid into ISAs every year since they came into existence and, these days, we both contribute the maximum £7,000 per tax year into shares ISAs. This has saved us thousands of pounds a year in tax -- money which we can use to build financial security later in life.

So, three cheers for ISAs -- what's keeping you from opening one today?

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